Is the Japanese Yen rebound imminent? Morgan Stanley predicts USD/JPY will bottom out at 140 in 2026

The Federal Reserve’s shift towards an easing policy and Japan’s proactive fiscal measures are changing expectations in the foreign exchange market. As of November 25, the USD/JPY stands at 156.60, slightly retraced from its high, but market focus has shifted to the next phase of exchange rate trends.

Accelerated Fed Rate Cuts Open the Yen Appreciation Window

Recently, Federal Reserve officials have adopted a dovish tone, boosting market expectations of a rate cut in December to 80%. Morgan Stanley’s strategic analysis team pointed out that if signs of US economic slowdown continue to emerge, consecutive rate cuts by the Fed will directly impact the strength of the dollar. Against this backdrop, the yen against the dollar is expected to rise nearly 10% in the coming months, providing tangible gains for investors holding yen — for example, with 8,000 yen, the corresponding TWD value will also increase accordingly.

Exchange Rate Returns to Fair Value, 2026 as a Key Year

Morgan Stanley analysts, including Matthew Hornbach, believe that the current USD/JPY rate has deviated from its fundamental value. They forecast:

• Q1 2026: The exchange rate will dip to around 140, reflecting the drag on the dollar from declining US yields
• Year-end adjustment: As the economy recovers, the rate may rebound to around 147
• Future outlook: Japan’s fiscal policy expansion is limited; if the US economy recovers in the second half of next year, arbitrage demand may once again push the yen lower

Bank of America Survey Confirms Expectations, Yen Could Be the Strongest Currency Next Year

This judgment aligns with the latest survey results from Bank of America. Among approximately 170 fund managers surveyed in November, nearly one-third believe the yen will outperform other major currencies in 2026. The reasons fund managers favor the yen include:

• The current valuation of the yen is significantly undervalued, with room for correction
• The Japanese government and central bank may further intervene to support the yen
• The US-Japan interest rate differential is expected to narrow, reducing the attractiveness of arbitrage trades

From this perspective, whether through top-tier investment banks’ quantitative models or frontline fund managers’ qualitative assessments, all point to the same direction: the yen’s appreciation cycle is likely to fully unfold next year.